Commentary: Machine Production in the Energy Industry, Part 1

As West Texas Intermediate makes its ascent towards $75 oil and optimism increases in our industrial sector, I cannot help but remember two economic writers whose books I read back in 2009:  Thorstein Veblen and John Hobson.

Thorstein Veblen
The Theory of Business Enterprise
Absentee Ownership and Business Enterprise

John Hobson
The Evolution of Modern Capitalism

These authors wrote around 1900, during the great American industrial revolution.  Although the authors said many good things, one topic that jumps out at me is their gloomy outlook on machine production.  They state, essentially, that in a machine economy, demand cannot out pace supply.  That is, 24 hour machine production leads to oversupply, unemployment, and economic collapse.

How true this appears to be in our industry.  At the Offshore Technology Conference this year, I spoke to many people from other oil producing nations.  The consensus is that nearly everyone is cutting back on oil production to get the price back up, Russia, Saudi Arabia, Nigeria – almost all the big players except the United States.  Yet in the USA, the inventories of oil related products remain high.  We just cannot burn it up fast enough.

Daniel Yergin produced a video about his book, “The Prize”.  There he describes how over-supply has been a chronic problem in the oil industry from the very beginning.  If the industry is not “controlled”, machine production will drive the price of oil down to $0/barrel.


Oil Tankers Off the Coast of Galveston, Texas

Just in my lifetime, living in Houston, I have seen so many wild economic swings in the energy industry.  Reminds me of the old saying: “The definition of insanity is doing the same thing over and over and expecting different results.”  As the specter of war looms over Syria, I have to ask, “Where do we go from here?”

I will try to add some perspective in the upcoming parts of this series.

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